National Bank National Bank Financial analyst Matt Kornack sees Canadian real estate equity investors continuing to be “at the whim of macro trends and volatility in bond yields” in 2024.
“We have already seen instability early in the year with trading gains being given back as rates ticked higher after a late 2023 move lower,” he said. “Consensus seems to have settled on the fact that future hikes are unlikely but concerns around the pace of cuts have been reflected in the long end of the curve. Our forecasts are predicated on our Economics & Strategy group outlook, which calls for Canadian 10-year bonds to reach 2.5 per cent by mid-2025 before rebounding to around 3.0 per cent by the end of the year, with that presumably forming a new longer-term range. On the short end they expect an end to the rate cutting to occur in Q1/25 with overnight rates reaching 2.75 per cent. The effects of this won’t be felt universally given debt maturity profiles, hedging and exposure to variable rate debt. While relative to our prior forecast this outlook is a plus, we still expect higher rates than those on maturing debt to trim 2 per cent and 3 per cent from earnings in 2024 and 2025, respectively, across our coverage.”
In a research report released Monday titled Oscillating to a New Normal, Mr. Kornack warned of the impact of the sector by turbulence brought on by elections globally, predicting Canada “won’t escape the collateral damage.”
“Canada is light on elections in 2024 (we just had a slew of provincial and municipal contests with the Federal government likely to survive until 2025), but the world is going to be busy choosing new/incumbent leadership,” he said. “An inherent tug-of-war between populism/nativism and liberalism will be on display with the U.S. election likely to have broader implications on regulatory frameworks, economic growth, international relations (particularly the trajectory of current global conflicts) and global trade/immigration patterns. There are winners and losers here: Canada could be a target of renewed trade protectionism but at the same time benefit from its looser immigration policies (Trump was a boon for Canadian office landlords as tech companies scrambled to take space in a geography that was open to global talent). We won’t avoid political posturing and populist policies entirely but expect these may be more pronounced towards the end of the year as Canada’s election calendar heats up in 2025/2026.”
He also sees 2024 as “the year of the merger,” expecting uncertainty steeming from potential M&A activity, particularly after New York-based Blackstone Inc.’s announcement of its US$3.5-billion acquisition of Tricon Residential iNC.
“While privatizations of mispriced assets may continue, our thought process was that we may see more in the way of merger activity as cost of capital has been prohibitive to growing portfolios. The REIT universe is small, and options are limited but some logical combinations would be CAR or IIP/KMP, NXR/PRV and DIR/SMU JV,” he said.
Mr. Kornack raised his targets for equities in the sector by an average of 7 per cent after introducing his estimates for fiscal 2025. For the current year, he made modest increases to his estimates to account for lower interest rate forecasts and steady fundamental drivers.
“We get the sense that more people are looking at the sector, but not yet buying,” he said. “Funds flow will likely be linked to the above noted interest rate theme but expect some pre-positioning on this front. Broadly speaking the sector will benefit from a return of generalist and retail capital, which may get flushed out of short-term interest-bearing instruments when the rate cut cycle begins.”
The analyst’s “focus ideas” for 2024 in order of favoured asset classes are:
Canadian Multi-Family: Killam Apartment REIT ( “outperform”) to $22 from $20.50. Average: $21.29.
Mr. Kornack: “We have seen a change at the top of our pecking order with Killam and CAP rising for different reasons. Changing rent control dynamics in KMP’s largest market will allow for it to put up similar organic growth to its Ontario-centric peers, while offering a discounted valuation on cap rate and earnings multiple. CAP has pulled back on the recent move higher in rates, providing an opportunity to buy the highest embedded MTM [mark-to-market], with undervalued density prospects and the best trading liquidity. The latter makes it a flow of funds magnet when REITs are in favour”
Industrial: Dream Industrial REIT (, “outperform”) to $16.50 from $16. Average: $16.
Mr. Kornack: “: Notwithstanding expected market rent growth flattening, MTM potential is significant and earnings prospects are strong. DIR and GRT top our pecking order with strong top-line performance expected, DIR primarily on capturing below market rent spreads while GRT has leaseup potential, a tailwind from the Graz renewal and a favourable 2025 lease maturity profile.”
Retail: RioCan REIT (“outperform”) with a $21 target (unchanged). Average: $21.63.
Mr. Kornack: “Management teams are optimistic on the prospects for stronger leasing spreads as options for tenants decline in the market and replacement costs require much higher economic rents. Our forecasting remains conservative with low single-digit SPNOI growth expected, but if we avoid a deep recession the pricing power pendulum is shifting to the landlords. RioCan and Primaris are the top total return prospects on valuation relative to portfolio quality”
Office: Allied Properties REIT (“outperform”) to $22 from $19. Average: $22.
Mr. Kornack: “:Office fundamentals have yet to positively inflect and while the space has been oversold we think investors will want more certainty on where NOI is heading before jumping in. That said, it is a place we expect some alpha as any relative sentiment shift could take these names higher (or lower) given operational uncertainty. Allied is our top pick on its diversified geographic footprint across urban markets and superior balance sheet positioning.”
Diversified: H&R REIT ( “sector perform”) to $10.50 from $10. Average: $11.13.
Mr. Kornack: “Within the diversified group, H&R remains our top focus idea, driven by earnings growth exposure to multi-family assets in U.S. markets and industrial development lease-up around the GTA combined with a better balance sheet and limited office maturities. Recent transaction activity was a plus as the REIT disposed of an office property at an attractive cap rate relative to our expectations. While we think H&R should trade at a narrower discount, it may take more time than originally expected to close this gap as the bulk of additional asset sales are on hold until market participants better understand the return environment.”
Cross-Border Housing: Flagship Communities REIT (, “outperform”) with a US$19.50 target. Average: US$20.31.
Mr. Kornack: “We expect MHC’s operations to hold steady as its affordable housing offer gains traction in a market increasingly concerned about cost savings. Tenancies tend to be sticky, and the REIT has proven that it can push rents given how low these are relative to other housing options. On that front, higher borrowing costs have pushed traditional homeownership further out of reach. With rate expectations approaching a plateau, we could also see more deal activity as prices adjust to a known cost of financing. MHC’s lenders continue to remain open to extending leverage for the asset class, enabling it to thoughtfully pursue accretive acquisitions over the coming year.”
The analysts’ other target changes are:
- Boardwalk REIT ( “outperform”) to $82 from $80. Average: $79.
- Canadian Apartment Properties REIT (“outperform”) to $55.50 from $53.50. Average: $55.77.
- Crombie REIT (, “outperform”) to $15 from $14. Average: $15.22.
- Dream Office REIT ( “sector perform”) to $11 from $8.50. Average: $10.31.
- First Capital REIT (, “outperform”) to $17 from $15. Average: $16.53.
- Granite REIT (, “outperform”) to $87 from $83. Average: $87.85.
- BSR REIT ( “outperform”) to US$13.25 from US$13. Average: US$15.30.
- InterRent REIT ( “outperform”) to $15.25 from $14.50. Average: $14.41.
- Minto Apartment REIT ( “outperform”) to $19.25 from $17.75. Average: $18.57.
- Nexus Industrial REIT ( “sector perform”) to $8.75 from $7.75. Average: $9.28.
- PRO REIT ( “sector perform”) to $5.74 from $4.75. Average: $5.92.
- SmartCentres REIT ( “sector perform”) to $26 from $24. Average: $26.03.
- Storagevault Canada Inc. ( “sector perform”) to $6 from $5. Average: $5.91.
- True North Commercial REIT (“sector perform”) to $8.75 from $8.65. Average: $9.29.
“The most significant moves were in names that have particularly high torque to rates, either because they are functionally limited in their growth prospects but have defensive characteristics, were carrying higher financial leverage or were overly penalized as funds flow moved away from the sector.,” he said. “Names here included AP (up 16 per cent), D (up 29 per cent), PRV (up 21 per cent) and SVI (up 20 per cent).
“We did not make any adjustments to ratings with this outlook and admit that we are heavy on Outperformrated names. This reflects a general high grading of our coverage universe but also a more optimistic outlook on funds flow into the space and valuations relative to financing costs.”